Self-Employed Net Profit Mortgage

How do you calculate affordability when using net profit as income?

Each lender has a slightly different approach in how they calculate it. I will work it out based on their criteria, and then I’ll determine the best outcome based on your particular set of circumstances.

It’s really going to depend on your intentions. If you need to maximise the borrowing you’re applying for, we’ll choose a lender who’s more generous. The affordability will differ in each situation, as every lender views self-employed net profit in their own way.

How many years of net profit figures do I need to apply for a mortgage?

There are options in the market where you can apply for a mortgage with as little as one set of accounts. You won’t have loads of options if you’ve only got one year, but there will be some. In most instances, lenders do like at least two, and some even ask for three.

Do lenders use the average net profit or the most recent year?

Most of the lenders in the marketplace will look to average the latest two. Obviously, those that accept one year’s worth of accounts just use that figure, and some will take an average over three years.

In some cases they wouldn’t average it out. If the figures are on a downward trend, for example, they’d actually take the latest year.

If it’s an upward trend, most lenders would take an average, but some take the most recent year – although that’s on a case-by-case basis. If you’re consistently going up in income levels, we can argue that it’s sustainable. Taking that higher figure rather than the average can be an option.

How does my net profit affect the maximum mortgage I can get?

It has a very direct effect. The net profit figure you arrive at will go into the affordability calculator and drive the loan size. Think of it like a basic salary. If you were getting paid £30,000, you would be able to borrow a certain amount. If you were getting paid £60,000, clearly that gets you a higher maximum loan. That net profit figure is very crucial.

Can I get different income multipliers based on net profits when applying for a mortgage? Do lenders apply a lower income multiple for self-employed applicants?

Again, all lenders have a specific income multiple that’s built into their affordability. It really just depends which lender you go to as to what their maximum multiples are. Typically, most lenders range from offering four up to six times your income as the maximum borrowing. Most fit somewhere between 4.5 and five.

With the self-employed, yes, some do enforce a slightly lower multiple than for someone who is employed, but others don’t. Again, it’s about where you need to fit from an affordability perspective.

If your only goal is to maximise the loan size based on your income, clearly we’ll look at a lender that doesn’t hinder you for being self-employed – or one that will take the latest year if that’s your biggest figure. All those things are built into our research.

Can you use projected income to get a mortgage?

No, you can’t use projected income in the affordability calculator, which gives you the loan size, but you certainly can use it to back up an argument for sustainability.

As I mentioned, if you’re on an upward trend we may be able to get a lender to take the most recent year. That’s more than last year and higher than the two year average. One way to do that is if you’re six months into the following tax year, you haven’t submitted that set of accounts yet.

If your current numbers are keeping with the previous year and show you’re on track to make the same again, or more, we can use that to convince the underwriter to take the latest year’s figure. But they won’t take future income that hasn’t been submitted yet – because that’s completely hypothetical and could change.

Are there any minimum income thresholds for self-employed applicants?

There aren’t any minimum income thresholds for residential applications. If you’re looking for a mortgage where you’ll be living in the property, you could apply even if you were to earn £2,000 on a self-employed basis. But that figure drives the maximum loan size.

If you need £100,000 and your income was £2,000, it would be rejected – that wouldn’t be affordable.

There can be minimum income requirements for self-employed net profit if you’re buying a Buy to Let, however. Quite a few Buy to Let lenders have minimum income thresholds, normally around £20,000 to £25,000. But a handful of lenders don’t have any minimum income requirements for Buy to Let either.

Are there different requirements for sole traders versus limited company directors?

Documents-wise, there are different requirements – because limited company applicants have access to more documents to use as evidence. That includes company accounts, which you wouldn’t have as a sole trader. Business bank statements will also be required from a limited company.

Also, it’s worth noting that your income can be very different, as well. If you’re a sole trader, generally speaking, your income is effectively your net profit. That’s the figure that you’ll be using for the affordability calculator.

A limited company applicant can actually apply for a mortgage using their share of the net profit within the company. That tends to be higher than the personal income they’ve drawn. Some lenders will actually look to use that net profit for affordability purposes, even if it hasn’t been drawn out – which can benefit those in a limited company.

If I operate under multiple businesses, how do you assess total income?

The easiest way to determine what the income is with multiple revenues is by looking at an SA302 – which is a tax calculation showing earned income. It will show money earned from employment, dividends, any salary from a limited company, and even if you’ve got rental income from Buy to Lets.

An SA302 is the document that you submit to HMRC which determines what your tax is for the year, so any taxable income will be on that document.

If we do end up going down the limited company route I mentioned, even if you had 10 limited companies, we would just get the accounts from each of those to see the net profit. If you’ve got multiple businesses, again, we’re not necessarily going to choose the more conventional lenders.

We might have to go somewhere more specialist, but having multiple streams of income is not a problem. It just means you need to probably deal with a broker who knows what they’re talking about and has been in that position before – and not just used to dealing with employed income.

What else do we need to know about a self-employed net profit mortgage?

The difference between employed and self-employed income is much greater than people realise.

It’s a bit like going to a GP – they’re generally going to be able to give you good health advice. But if you were dealing with a specific health condition, you would be sent to a consultant. That’s the difference between a broker who deals with employed income and a self-employed specialist mortgage broker.

That’s how we see ourselves. If you do have a more complex situation, it’s definitely worth finding the right advisor.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.